The Highlights
Jumbled financial reporting is the #1 deal-killer in SMB M&A
Most founders don’t realize their books are messy, they’re just used to the chaos
Clean financials = trust, speed, and leverage in deal negotiation
Real example of what spooks acquirers fast
A simple playbook to clean up your books
The Financial Fog
I’ve reviewed 150+ businesses to take to market from $1MM accounting firms to $20MM engineering companies.
Here’s what I can say with confidence:
Many of them have confusing books.
Not because the owners aren’t capable or because the business isn’t viable. It’s largely due to the mess creeping in slowly and solidifying over time. The $1,500/month bookkeeper never asked questions or brought up a concern. Of course the owner didn’t look into COGS allocation, inventory turnover, accrued vacation pay, or discretionary expenses. As these factors mount, numbers get jumbled over time and slowly become the norm.
Then one day, they want to sell. And those “messy but manageable” financial statements turn into a headache and shaky trust come deal time.
A Real-World Example
I reviewed an 8-figure revenue talent management company.
Quite profitable, with recurring contracts, and an incredible client list. The numbers however, were a maze.
• Several recreational vehicles flowing through the company, totaling $1MM+
• Heavy discretionary expenses scattered throughout various expense lines, linked back to personal real estate renovations
• An eye-watering amount of accrued cash sitting idle on the balance sheet
When we pointed it out, the owner replied: “That’s just how I’ve always done it”
That opportunity went from desirable to risky in a single conversation. This was being proposed as a share (stock) deal, so the inherent liability to a buyer would be substantial and the tax burden of the seller (because of the cash accrued), would result in a hefty bill upon sale.
Who would buy this and feel reasonably good about the state of affairs? Not many candidates I can think of.
Why Buyers Care About This..
Buyers don’t just want clean income statements. They seek confidence, clarity and to feel a sense of trust. Clean books give them all three. Confusing financial reporting highlights; blurry operational efficiency, untracked/potential liabilities, and future surprises. I’m all for a nice surprise, but these are not the kind that are well-received.
If this sounds like your business, it doesn’t mean you need a complete overhaul. But if your numbers don’t paint a clear picture and tell a compelling story…
You are not quite ready to sell.
Cleanup Plan
Here’s what we tell founders to clean up:
Hire a quality bookkeeper or fractional CFO
Someone who understands your business, is backed by positive referrals, and is proactive in suggesting adjustments to your model (not just data entry).Ease up on out-of-bounds perks, and expenses
Stop being short-sighted and running your business like a personal piggy bank. Remove personal expenses from the equation.Standardize categories and expense allocation within your statements
Reporting structure and allocation of expenses should not look different from year to year. This allows tracking of trends and makes it easy to review performance year over year.Get monthly financials, and actually review them
If you don’t have a basic understanding of your numbers, a buyer will probably have a tough time with it too.Ask an advisor to risk-assess
Let someone inspect your books from the perspective of a buyer and presuppose the scrutiny you’ll face in due diligence.
Tangible Takeaways
Financial sloppiness is the fastest way to kill buyer trust.
“Normal for you” becomes an issue if you’re the only one who can explain where and how money flows.
Buyers need clarity, and will discount value or walk away if it’s not apparent.
Clean books increase your leverage and exit value.
You don’t need perfection. Just consistency, simplicity, and support.
Get Ahead of the Issue
Most owners don’t think their books are messy. They’ve just accepted a narrative over time.
But the market won’t be as forgiving.
Get ahead of this now. Reap the rewards down the road.
👉 Follow @exit_expert for advice on selling your business.